A lot of seemingly positive economic data came out last week, but in his most recent podcast, Peter Schiff said it is just feeding into a delusional economic narrative that ignores the most fundamental storyline – debt. Everybody is talking about a new era of prosperity, but Peter said it’s a phony prosperity and it isn’t going to last.
The May jobs report came out Friday, sending another ripple of optimism through the investment world. According to the Department of Labor, the US economy added 223,000 jobs in May. The unemployment number fell to an 18-year low of just 3.8%. Average hourly earnings rose by 8 cents. Average wage growth came in at 2.7% over the past year. Pundits and prognosticators on the major financial networks were giddy at the news.
But the good economic news wasn’t limited to jobs. Analysts were also excited about the personal income and spending data – particularly spending, which rose 0.6% in April. Meanwhile, income was up 0.3%. Peter put this into some perspective.
Consumers are spending money twice as fast as they’re earning it for the month of April – six-tenths up on spending, three-tenths up on earnings. So, what does this tell you? People are tapping into already a pretty shallow savings pool, or they are running up more credit card debt to buy stuff.”
Of course, everybody likes this. In the short run, this is great because spending feeds into GDP. It can make everybody feel good about this false narrative about the US economy. Despite all of the fundamental issues facing the economy – namely the massive levels of debt – most of the mainstream is exuberant.
America is a sea of prosperity. Our economy is immune. We’re just going to keep on growing, even though we’ve got a rising cost of living, even though we’ve got increasing interest rates, massive debt on all levels, all these big-picture problems that we’ve got, but everybody assumes there’s nothing to worry about. In fact, you look at CNBC, I was watching them, today after the jobs numbers… and they are so excited – to a man. I mean, they’re just giddy, like little schoolgirls, about the stock market. Everything is perfect. Nothing can go wrong. Keep on buying.”
In fact, Trump’s new economic advisor, Larry Kudlow, went on CNBC and declared America is in a new era of prosperity. But as Peter pointed out, these same people were saying the same things in 2005, 2006 and 2007. You know what happened next.
It’s worse now. The economy is in worse shape now than it was before the financial crisis. No question about it. All of the fundamentals are much worse. And therefore, the collapse is going to be much worse. But you’ve got them talking about this ‘new era of prosperity.’”
The entire economy is built on debt. Take the tax cuts for instance. Tax cuts are great because they put more money in your pocket. But there were no cuts in government spending. So, we are simply borrowing more money.
If you make everybody happy by going deeper into debt, you can have some phony prosperity for a period of time. Not a very long period of time, but enough for people to get all excited about it. I mean, that’s what happened in the run-up to the 2008 financial crisis. A lot of people got excited about a phony prosperity, but the problem with phony prosperity is that it’s phony. And when it’s phony, it doesn’t last. Just like a drug high. It only lasts until the drugs wear off. And the drugs always wear off. You can’t stay high forever. You can try, but it’s not going to work. We’re going to try. We’re going to do QE4. We’re going to cut rates again. But it’s going to end in overdose. It’s going to end in a collapse of the dollar. But the point is, right now, you’ve got all these Republicans talking about how great everything is because we’re living on borrowed money. We’re living in a gigantic bubble. And we know bubbles are going to pop.”